Monthly Archives:

December 2006

The rising cost of Christmas

Inflation is set to be a dominant theme in 2007. Will a cooling US economy and global rising rates offset higher energy and raw material increases? We have been scouring around for data and have found the Christmas Price Index. Someone with too much time on their hands has created an index that tracks the cost of the elements in the song “the 12 days of Christmas”.

The Christmas index has risen…

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Escalating M&A + pension fund crisis = inverted yield curve

The impact of pension fund demand on long dated bonds is generally understood, but few realise that rising takeover activity is amplifying this effect. In order to protect people’s pensions, the pension regulator is insisting that the acquiring company fully funds the takeover target’s pension fund deficit. Last week, for example, both India’s Tata Steel and Brazil’s CSN offered to fund Corus’ …

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Home Depot Strikes Back

Richard wrote on December 4th (see here) about a potential gigantic leveraged buyout (LBO) for Home Depot in the US. Since then we have seen the company’s CEO describe the rumours as an ‘unfortunate distraction’ and issue $5bn worth of bonds. So was the bond issuance announced a mere number of days after the LBO rumours a co-incidence ? I’d suggest not.

Typically when a company looks to come to…

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Which mutual funds are US investors buying?

The US mutual fund market has much more transparency than here in Europe and AMG Data produce weekly returns of flows into different types of asset classes. So far in 2006, flows into equities have beaten flows into bonds ($60bn into equities vs $42bn into bonds). However, within the bond component, investment grade funds (+$41bn) and international bonds (+$7bn) grew at the expense of governmen… Read the article

Complacent about emerging market bonds?

Whilst the bull market in credit (especially high yield) has got all the headlines over the past few years, one bond asset class has been an even more spectacular performer – emerging market debt (EMD). In mid 2002 the yield premium over US Treasury bonds for the EMBI+ emerging market bond index was a massive 11%. Today it’s just 2% for an average credit quality somewhere around the BB or B lev… Read the article

One Final Letter from New York

Amongst discussions we had last week, a growing concern over delinquencies within the subprime mortgage market raised its head. The $1.3 trillion subprime mortgage market, which is a bit more than a tenth of the overall US mortgage market, caters to home buyers with poor credit records or those who might have trouble paying off their mortgages.


Concern has been growing in the US as the yield …

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Credit Derivatives to Approach $40 Trillion in 2008

Credit default swaps (CDS) , originally conceived by banks over a decade ago to enable the transfer of credit risk are set to approach $40 trillion in size by the end of 2008 according to Deutsche Bank’s credit strategist John Tierney. Trading in indexes based on credit-default swaps and other variations of derivatives that allow investors to speculate on the ability of companies to repay their…

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Fed on US housing: “gradual” cooling becomes “substantial” cooling

The Fed’s FOMC policy statement released last night was notable for a significant downgrading of it’s assessment of the US housing market. In a world where economists look for even the smallest changes of emphasis in the wording of the FOMC statement from month to month, the move from a “gradual” cooling in housing to a “substantial” one was enough to see short dated US Treasury bonds rally by … Read the article

UK inflation surprises to the upside – now watch wages

This morning’s inflation data was higher than expected, with the CPI measure targeted by the Monetary Policy Committee coming in at +2.7% from a year ago against +2.4% the previous month. The headline RPI measure was also very strong at +3.9%. For me, the biggest risk to further UK rate hikes remains the prospect of workers seeing this headline rate of inflation approaching 4% (it’s not been th…

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Letter from New York Part II

Those who have read Jim’s note of this morning will be aware that he and I spent the latter part of last week in New York. Whilst the US economy dominated many a meeting and conversation another prevalent theme and concern was the leveraged buyout or LBO. Those familiar with our views will be well aware this is something that has concerned us as a team for sometime now. Flush with a record $172… Read the article